JP Morgan To Purchase WaMu Deposits

The WSJ is reporting that JP Morgan will purchase the bulk of Washington Mutual's operations. This is being billed as a "government brokered deal," although it is not expected to affect the FDIC.  Perhaps the Fed is granting yet another one of its generous Bear Stearns-like loans?  The Fed seems to like arranging these types of deals for JP Morgan.  Details of who exactly will be swallowing the losses from WaMu's $60 billion option arm portfolio will be revealed on the conference call at 9:15 pm Eastern.    

Update: JP Morgan is acquiring Washington Mutuals assets and deposits from the FDIC for $1.9 billion.  Reuters reports that the FDIC felt it had to seize the bank before Friday to quell customer anxiety fueled by media leaks.  WaMu had suffered an exodus of $16.7 billion in deposits since September 15th, leaving it with insufficient liquidity.  Shareholders and senior bondholders will be wiped out in the deal.  

Why do we need a $700 billion bailout when JP Morgan can just buy every ailing bank?  Seriously, this is a fine example of why we shouldn't allow the government to pay "hold-to-maturity" prices for assets.  In this situation, a bank failed, and a healthier bank was willing to purchase the assets and deposits.  Shareholders and bondholders were wiped out, depositors were saved, and JP Morgan assumed the remaining risk in WaMu's portfolio because it purchased the assets at what it determined was a good price.  This proves that investors are willing to make opportunistic acquisitions at the right price.  Paulson and Bernanke's idea of buying assets from banks at prices above fair value would be a money-losing proposition.

Rating Agencies Put Nail in Coffin of AIG, WaMu

What does every 5% one-day drop in the Dow really need to give it a big boost?  How about an after-hours downgrade by the rating agencies of the two financial institutions currently perched on the bankruptcy precipice.  The folks at S&P were apparently the last people in America to figure out that WaMu's credit was below-average as they finally downgraded the stock to "junk".  The downgrade of WaMu was a foregone conclusion (it's a $2 stock, for the love of God) and shouldn't have any immediate affect on the bank other than merely stating the obvious.  It was the other after-hours downgrade that further torched financial markets.  After a brutal day, during which AIG's stock was down another 51% and the company was forced to go begging for cash from the state of New York, to the Fed, to what remains of the investment banking community, AIG was slapped with the final indignity: a downgrade of its credit ratings by S&P, Moody's and Fitch.  The downgrade will force the insurer to post more collateral against its derivatives portfolio, thus creating serious liquidity problems.  It's very interesting that the ratings agencies just figured out TODAY that AIG was carrying a tad bit too much risk in its derivatives portfolio relative to its capital base.  In fact, I would label this revelation as inconvenient and extremely unproductive given that the capital markets are paralyzed with fear and are unwilling to lend to yet another financial institution trapped in a death spiral.  The Fed has asked Goldman and JPMorgan to make $70 to $75 billion in loans available to AIG.  Unnamed sources claimed they overheard the investment banks exclaim "Say What?" in response to the request.  The Fed has also hired Morgan Stanley to examine alternatives for the beleaguered insurer.  It is rumored that Morgan Stanley took the Fannie and Freddie bailout plan they recently crafted for the Treasury, scratched out their names, replaced it with AIG, and left the memo on Paulson and Bernanke's desk.  

SEC Chairman Chris Cox has been remarkably quiet during the recent turmoil.  Perhaps he has finally discovered the joys of shorting stocks that go down 99% within weeks and is reluctant to impose restrictions.  If Mr. Cox wanted to make himself useful (which is questionable), he should've put a temporary freeze on rating agency downgrades rather than going after short sellers.  The agencies are too late to do anyone any good.  They are merely inciting further panic.  Note the 6% plunge in the Nikkei and the drop in the S&P futures after hours.  Prepare yourselves for another volatile day. 

Management Shake-Ups at Lehman and WaMu Can't Change Stinky Investments

If ever there was a time to slip some management changes in below the radar, this weekend was it.  While every investor worth his salt was furiously calculating a new price target on Fannie and Freddie's common and preferred, it was easy to overlook the ousting of a few key executives.  Washington Mutual gave its CEO Kerry Killinger the boot.  According to the Bloomberg report he was ousted "after he failed to halt losses tied to home mortgages."  The newly appointed CEO Alan Fishman, formerly of Meridian Capital, will take a shot next to see if he can halt the losses.  The stock initially ripped on the announcement, before investors realized that a new CEO can't change the fact that the company's balance sheet reeks like a pile of stinking dung.  Speaking of balance sheets that reek, Lehman has shuffled its management yet again.  The company is replacing the current head of fixed income (who spent all of seven months at the post) with two other guys I've never heard of (feel free to click on the link if you actually care about names.)  Dick Fuld remains in charge, and will continue attempting to concoct some sort of spin-off, recap, asset-sale, financing, write-down, half-caff with a twist, but with new yes men by his side.  In my last post about Lehman, I went out on a limb and offered to eat my crox if a deal with KDB actually materialized.  I have yet to put my bib on, so it's looking good for me.  The only good news I can find in the headlines for Lehman and WaMu investors is that Hank Paulson is finished with his Fannie and Freddie plan.  That means he can move on to the next bailout package.  

Wa Mu: What's Another $3.3 Billion?

Washington Mutual proved yet again that it could extract more value from its operations by firing everyone except a few beefy guys to shovel deposits into an incinerator.  Can a handful of former bankers work fast enough to incinerate $3.3 billion in a quarter?  It seems unlikely.  However, the bank had no problem burning through another $3.3 billion on its lousy portfolio of assets.  The Seattle thrift reported a net loss of $6.58 a share, which included a charge related to the $7 billion capital raise the company announced in April.  Excluding the charge, WaMu reported a loss of $3.34 a share.  Apparently, analysts, if you still care what they think, were expecting a loss of $1.05 a share on this basis.  Naturally, the stock immediately ripped higher after the earnings report.  Why?  I haven't a clue.  I suppose the same reason that Wachovia rallied nearly 30% after reporting an $8.9 billion loss before the open.  If anyone out there knows the reason, feel free to enlighten the rest of us.  In the meantime, I'll be scratching my chin until I come up with an explanation.        

WaMu, Wachovia Resort To Desperation

Once the bread and butter of Washington Mutual's core business, negative amortization loans are going the way of the dodo bird, the company announced last week.  In a brilliant PR move, the announcement to discontinue negative amortization and "flexible payment" loans was buried in the ninth paragraph of a press release WaMu issued on June 18th touting an additional $1 billion assistance fund for troubled mortgage borrowers.  The press release did not indicate what the company planned to offer as assistance to its credit card account holders.  Through its ill-timed purchase of Providian Financial, WaMu entered the business of credit card lending to questionable borrowers in 2005 at the peak of the bubble, and has aggressively increased its credit card accounts since.  No surprise that WaMu has the highest proportion of overdue loans among the top 15 providers.  Given how lousy WaMu's timing has been, I suppose it is also not surprising that it took WaMu a year into the credit crisis to figure out that maybe, just maybe, it should stop offering negative amortization mortgages.

Meanwhile, Wachovia has apparently given up trying to solve its own "pick-a-payment" mortgage problem and has hired Goldman Sachs as an adviser.  I imagine that Goldman may take one look at Wachovia's loan portfolio and immediately short the stock.  Wachovia's hiring of Goldman has started the rumor mill once again that some white knight will come along and rescue Wachovia.  JPMorgan is always considered a likely contender, but I'd bet against it.  Wachovia, after all, is still a $17 stock.  When it gets to $2 and comes with a $50 billion loan guarantee from the Fed, maybe Jamie Dimon will start negotiating.  

Goldman was more than likely tapped by Wachovia not only because it has managed to avoid damage suffered by its competitors, but possibly also for arranging the restructuring of Cheyne Finance, the $7 billion SIV that collapsed last year.  If any bank knows what to do with a bunch of underperforming assets, it should be Goldman Sachs.  More than likely, Goldman's solution for Wachovia will mirror what they just pulled off with Cheyne.  Just spin it all off into another investment vehicle and make sure that Goldman gets paid a portfolio management fee after marking the assets down significantly.  Nice gig if you can get it.

Wachovia and Wa Mu Give Leaders the Boot

Wachovia ousted its CEO Kennedy Thompson, as the board opted to blame him for losses that cost the lender more than half its market value...so far. Meanwhile, in other juicy scapegoating news, Washington Mutual's Chairman Kerry Killinger stepped down, after shareholders voted to oust him in April. The board indicated it was responding to feedback from its shareholders. The board may also wish to canvas shareholders for some good ideas on how to stop losing buckets of money. Anyone with feedback in that department is welcome to put it on the shareholder's ballot for a vote. But you'd better hurry because we may not make it to the next shareholder's ballot...

"Liar Loans" Live Up To Expectations

Investors who purchased soured mortgages securities are forcing lenders to repurchase the original loans based on a provision that required lenders to take back loans that defaulted unusually fast if mistakes were made or fraud was committed during the underwriting process. The Wall Street Journal reported yesterday that Countrywide estimated that its liability for such claims rose to nearly $1 billion as of March 31, 2008. Countrywide took a first-quarter charge of $133 million for claims that have already been paid. The loan disputes allege bogus appraisals, inflated borrower incomes, and other misrepresentations made at the time the loans were originated. Demands from loan buyers include Fannie Mae, who claimed in a recent conference call that it was attempting to review every loan that defaults and force lenders to buy back loans that failed to meet promised standards. The bond insurers including Ambac and MBIA which guaranteed investment-grade securities backed by home-equity loans and lines of credit are also getting in the game of scrutinizing the quality of loans in the original pools and taking action where necessary. Even GE, through its subprime mortgage subsidiary WMC Mortgage, is being sued by PMI Group who alleges that WMC misrepresented the quality of loans it included in a pool of subprime loans that were insured by PMI.
Offering further proof that the incidence of misrepresentation was not merely a subprime problem, S&P cut or downgraded its ratings on $34 Billion of Alt-A securities yesterday. Ratings on 1,326 classes of bonds created in the first half of 2007 were reduced. Another 567 similar bonds with AAA ratings were placed on review. A total of 14% of the bond issuance from the period was either cut or placed under review. Late payments of at least 90 days and defaults among Alt-A loans underlying the bonds issued last year rose to 6.64% as of April 2008, up 65% since January of 2008. Clearly the situation is getting worse rather quickly. Alt-A loans were made to borrowers who provided little-to-no documentation of income or assets but had respectable credit scores. Among skeptics they were deemed "liar loans", as it gave borrowers ample opportunity to fabricate their income and assets in order to receive loans to purchase houses they otherwise could not afford. Investors in the securities must've assumed that either borrowers were telling the truth or home prices would never decline. Loans were offloaded by the originators to investors who were more than willing to purchase diversified pools of these loans as they were given AAA ratings by the ratings firms.
Investors are now facing the double whammy of misrepresentations of the borrower's financial condition coupled with declining home prices across the nation. As a consequence, default rates on the loans are surging beyond original estimates when the securities were structured, leaving investors with losses. The ratings agencies are, of course, late to the downgrade party as the securities are already being pummeled in the market. Pissed off investors are now attempting to recoup losses by forcing the originators to repurchase the loans because the quality of the loans was misrepresented. The top four Alt-A lenders in early 2007 were Indymac, Countrywide, GMAC, and Washington Mutual. Clearly these once celebrated lenders have suffered a considerable drubbing. Yet, bottom-fishers have emerged, betting that their fortunes will turn. Given the continuing parade of lousy housing news, I remain a skeptic. Furthermore, I'm disappointed that I never took advantage of the opportunity to purchase a $25 million home using my imaginary bars of gold as a stated asset.

Pending Home Sales Hit Record Low, Again

Pending home sales hit a record low for the second consecutive month in March. March's reading was down 20.1% year-over-year and 35% from the index's peak in April 2005. With the recent resilience in homebuilder stocks, powered by those who must believe that the housing market is bottoming, these numbers should be a disappointment. In my universe of understanding, a bottom should be followed by some sort of uptick, not continuing declines. The nagging persistence of weakness in the housing market is perplexing to those who subscribe to the theory that loose monetary policy always juices the market. The Fed has done its part, now where are all the buyers? Or was a large portion of demand in the housing market merely the result of lenders handing money to anyone with a pulse who claimed to have assets and income?
A close look at Fannie Mae's earnings yesterday reveals that the company has a problem with its Alt-A portfolio. Apparently, $946 million of the $2.2 billion in losses incurred during the first quarter involved Alt-A loans. The company went on to state that it had $344.6 billion in Alt-A exposure and a limited strategy for stemming future losses. For those unfamiliar with Alt-A mortgages, they are backed by loans to borrowers with higher credit ratings than subprime but have little to no documentation of a borrower's assets or income. Fannie's Chief Daniel Mudd said the vintages performing the worst in a four-year average book were late '05, '06, or early '07. This should not come as a surprise as housing prices peaked in 2005, and mortgage lenders dropped like flies in early 2007, causing what is the biggest problem for current mortgage borrowers: the lack of ability to refinance. The inability of overextended borrowers to refinance into a more favorable loan is the root of surging delinquencies leading to foreclosures. It is such a big problem that I don't believe any government plan will be able to adequately address it.
Here is the link to a fantastic post on a UK blog which follows the path of one single mortgage pool of $500 million in Alt-A loans securitized by Washington Mutual in May 2007. The average credit score of the pool was 705, 92.6% was originally rated AAA, even though only 11% provided full documentation of assets. Less than one year later, in April 2008, 29.07% of the pool was 60 days delinquent or more, 13.87% was in foreclosure and 6.21% was an REO (the property had reverted to the lender after foreclosure.) These numbers grow worse and worse every month. When I hear the pundits talking about the prices of MBS being grossly understated due to unrealistic default rates priced in, I wonder if they've looked at some of these stats. This particular pool, which was not even subprime, is looking at potential default rates of over 50% and it isn't even a year old. Then I look at FNM's statement that it has $344.6 billion in Alt-A exposure. I scratch my head at why everyone rushed out to buy FNM's stock yesterday. Then I go to Costco and buy my alloted bag of rice for the day.

Wa Mu Raises Money to Last Seven Quarters...

In case you haven't heard the news, Wa Mu is getting a $7 billion capital infusion from TPG, the big private equity group. WM is selling 176 million common shares for $8.75. So if you are buying the stock right now for $12.50 or so, you're a chump! Separately, yet somehow strangely related WM reported a "preliminary" first quarter loss of $1.1 billion. Initially, TPG's capital infusion was rumored to be around $3 billion. Then the number went up to $5 billion. Now it is $7 billion. I guess TPG wanted their investment to last at least seven quarters, so they could collect some management fees from their investors. Seriously, this may prove to be a very good investment for TPG, but it's difficult to know at this point. WM holds $58 billion in option arms in its $110 billion loan portfolio. Furthermore, WM has $60 billion in home equity loans as well as an addition $20 billion in subprime home loans and home equity loans. We'll see how many of those option arm borrowers pick the option of walking.